* Citi shares close up 8.5 percent on Thursday
* Shares rise as investors bet on long-term gains
* KBW bank index trading at highest level this year (Recasts; adds stock data, comments; updates shares)
By Steve Eder and Joe Rauch
NEW YORK, Aug 20 (Reuters) - Citigroup (C.N) shares rose nearly 9 percent on Thursday to their highest level in more than three months, leading a wider industry charge and reflecting growing confidence the embattled bank would become more profitable as it unloads troubled assets.
Citi shares closed up 35 cents, or 8.47 percent, at $4.48 on the New York Stock Exchange. The stock has soared 56 percent during the past month, a bigger jump than any of its peers in the KBW Banks Index .BKX.
The index gained 2.87 percent on the day to reach its highest level of the year. Only three of the 24 banks in the index posted price declines for the day.
Citigroup led the way, its shares rebounding after higher-than-expected second-quarter profit and a high-level management shake-up.
Bank analyst Richard Bove, at Rochdale Securities, said some investors, gaining confidence that Citi will become more profitable as it unloads its troubled assets, are betting that Citi shares will triple in three years.
"People are buying it now in expectation of the triple because they made the decision that all of the negatives that could happen don't mean anything," Bove said.
Citi's shares are still well below their 52-week high of $23.50 in October. Citi's shares had fallen to a low of 97 cents in March on fears about its toxic investments and government intervention.
Citi's troubled assets include subprime mortgages, corporate loans, home loans, and commercial real estate mortgages, which the bank has been writing down and looking to offload.
Citi received $45 billion of bailout money from the U.S. Treasury's Troubled Asset Relief Program, or TARP, and the government now owns a 34 percent stake in the company.
Citi's stock is now moving in upward lock-step with other stocks where the U.S. government has a great interest, said Jason Goldberg, an analyst at Barclays Capital.
For Citi, news that the Swiss government plans to sell down its stake in UBS UBSN.VX(UBS.N) is triggering optimism that the U.S. government will eventually loosen its grip on Citi.
"At some point, the government will get out of Citi, and it is a potential catalyst," Goldberg said.
Smaller regional banks posted similar gains on Thursday, but were still well below their 52-week highs.
State Street Corp (STT.N) shares rose 5.4 percent, or $2.79, to close at $54.06 and were the second-biggest gainer in the broader KBW bank index, but 26 percent below their 52-week high.
Shares in Atlanta-based SunTrust Banks Inc (STI.N) climbed 4.1 percent to $21.46 per share, the highest level for the Southeastern bank since January 2009, but still below a 52-week high of $62.75. (Reporting by Steve Eder and Joe Rauch; Editing by Steve Orlofsky, Gary Hill)